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Economy

Brexit could spell trouble for Pacific exporters

In Fiji, some sugar cane is still carried by train, a legacy of the British colonial era. (Photo by Michael Field)

AUCKLAND, New Zealand -- Britain's vote to leave the European Union is raising concern among Pacific nations, which include a number of former British colonies, about the outlook for some of their major exports.

EU trade preferences prop up the price of Fijian sugar and permit duty-free imports of other Pacific agricultural goods, including palm oil, coffee, coconuts, and fish and caviar. Pacific shipments to the EU amounted to 1.3 billion euros ($1.44 billion) last year and are particularly important to the region's larger economies. The U.K. is Fiji's second largest merchandise export market, after Australia, and EU shipments account for close to 6% of Papua New Guinea's gross domestic product.

"Concerns have emerged on the effects of Britain's exit," Reserve Bank of Fiji Governor Barry Whiteside warned in a quarterly monetary policy statement a week after the vote.

The EU's existing preferences particularly benefit former British colonies like Fiji in a bloc known as the African, Caribbean and Pacific Group of States, or ACP. Several of the former Pacific colonies still incorporate the Union Jack in their flags, and the EU is the second largest aid donor to ACP Pacific states, after Australia.

The preferences influence where importers like Tate & Lyle Sugars, Europe's largest sugar cane refiner, buy their raw materials from, said Jon Fraenkel, a professor at Victoria University in Wellington who focuses on Pacific politics.

"It's the tariffs against all the non-ACP sugar that have ensured that Tate & Lyle's big refinery on the River Thames remains tied to sourcing its sugar from places like Guyana, Fiji and Mauritius," Fraenkel said. He said companies like Tate & Lyle Sugars would prefer to import from lower-cost producers like Brazil, Australia and Thailand.

Gerald Mason, a senior vice president at Tate & Lyle Sugars, publicly campaigned for Brexit. "Last year, EU restrictions and tariffs pushed our raw material costs up by nearly 40 million euros alone, turning what should have been a good profit that we would all share into a 25 million-euro loss," he said in a letter to staff before the vote.

Shipments of sugar from Fiji's cane fields to British refineries start by truck. (Photo by Michael Field)

Under an agreement with state-owned Fiji Sugar, Tate & Lyle contracted to import up to 300,000 tons of sugar a year between 2008 and 2015. Though the agreement expired in September, a Tate & Lyle Sugars spokesman said, "We are still the main buyer of raw cane sugar from Fiji, and we aim to maintain that long-standing relationship in the future." He added that the company's purchasing arrangements would not change until there is more clarity about new U.K. trade policies.

Industry in trouble

As it stands, the EU's preferences benefiting ACP sugar are set to expire on Oct. 1, 2017, and Fiji's sugar industry is already in trouble. Though three-quarters of the country's arable land is planted with sugar cane, last year's harvest of 1.84 million tons of cane was one of the lowest ever due to a combination of poor weather and agricultural conditions, and changes in land leasing arrangements. Cyclone Winston inflicted further damage in February, destroying about 80% of the crop then in the fields and damaging two of Fiji Sugar's four crushing mills. Recovery remains a long way off.

Officials in Fiji and elsewhere are seeking assurance in the extended period it is expected to take for the U.K. to extricate itself from the EU. "[It] gives us a bit of time to analyze the market and understand what strategies to put in place," said Abdul Khan, chairman of Fiji Sugar.

The British high commissioner to Fiji, Roddy Drummond, told a radio interviewer, "It may be that there is not as much change as people think, except in how we deliver these [aid] programs."

Simon David Tonge, his colleague in Papua New Guinea, told a local newspaper that trade flows should remain unchanged for now. "For example, New Britain Palm Oil will continue to send their palm oil to their refinery in Liverpool as normal," he said.

Brexit chill

Other products besides sugar could also feel a chill from Brexit, however.

"The EU, potentially, might become less interested in the Pacific, and what interest there is might well be shaped to a greater extent by French priorities," Fraenkel said. France still has several colonies in the Pacific, including New Caledonia, Wallis and Futuna and French Polynesia, as well as a significant military presence and extensive exclusive economic zones for fishing.

The Brexit referendum came as Papua New Guinea officials were traveling to London and other global financial centers to promote a planned $1 billion bond issue. The issue, which would be the country's first in overseas markets, is needed to fill budget gaps that opened because government revenue has come in 20% below expectations, due to low commodity prices.

Yurendra Basnett, the Asian Development Bank's country economist for Papua New Guinea, said he suspects the British vote may make it "quite challenging" to raise money in the new environment of global uncertainty. Papua New Guinea officials have made a number of unsuccessful attempts to access the global bond market previously.

Once the U.K. leaves the EU, the Commonwealth -- the global grouping of former and current British colonies -- is likely to assume greater importance for members such as Papua New Guinea and Fiji. But the transition leaves much uncertain, as Patrick Gomes of Guyana, the ACP Group's secretary general, said on July 1.

"There is some time before the ACP will know what are the substantive areas in the 'divorce agreement' of the U.K. and EU, [so] the ACP Group is setting about pre-emptive actions and will adopt a multi-pronged strategy with a view to securing interests of the ACP member states" regarding trade, investment, technology transfer and aid, he said. But Gomes noted that with the departure of the U.K. from the EU's aid committee, "The ACP will lose an ally of great value."

With additional reporting by Nikkei Asian Review associate editor Han Nee Tay

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